TAXED OUT

March 29, 2010

Most of the government's receipts come from taxes. Of these, the largest source of revenue is the personal income tax. In addition, our progressive tax system results in Americans who earn 50 percent of all income paying about 97 percent of total income taxes. Add in compliance costs, complexity and length of the income tax forms, the redistribution of wealth by means of refundable tax credits, the abuses of the Internal Revenue Service, the use of the tax code for social engineering, and the intrusive nature of the whole rotten scheme -- and you have a system ripe for reform, says Vance.

The tax reform idea that has been around the longest is the flat tax. Under a flat tax, there are no tax brackets -- every taxpayer's income is taxed at the same rate -- and there generally no deductions. There are, however, two problems with flat tax proposals, though not necessarily with the concept of a flat tax itself, says Liberty.

First, the last thing the United States government needs is more money. Clearly, Congress needs to cut spending critically. Simplifying the income tax is a great idea, but not because it provides Congress with more money to spend.

Second, flat taxes, as proposed, are still progressive taxes, demanding a higher percentage from people with higher incomes. Under a flat tax plan, no one actually pays the stated rate, and not everyone pays the same percentage, because of such things as refundable tax credits and exemptions for lower income people.

The problem with most tax reform plans is that they focus on simplifying the tax code, or on some arbitrary concept of fairness, rather than making the code less progressive. Even worse, they do not even hint at lowering American's overall tax burden, says Liberty.